The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, June 27, 2016.
The Taming of the Shrew is perhaps the most well known comedy ever penned by William Shakespeare, adapted time and again over the years due to the many plot twists and turns that appeal to an increasing sophisticated and demanding audience. So here's another, Janet Yellen, the present personification of the Federal Reserve, and the protagonist, has tricked the American (and global) population (the Shrew) into believing that they are 'important', which is why they go to such great lengths and theatre to do so; when all the while what they are really doing is imposing psychological torments until compliance and obedience become mandatory (financial repression) - the 'taming' of the debt serfs if you will. It's been a long road from Jekyll Island to negative interest rates (NIRP) (it's coming), however the story remains the same, at least for now.
As process unfolds however, the negative impact(s) of NIRP continue to ripple through economy(s), setting the stage for what will likely be looked back on by historians as the ultimate irony of this comedy - that in fact the Fed is the 'unwitting shrew', and tamed by its' protagonist - Mother Nature. Because at some point, earthly constraints associated with the perversely profound impact of negative rates will become germane on a systemic basis, bring down pension funds and insurance companies alike, and then the larger financialized economy. Thing is, if NIRP is not enough to satisfy the protagonist, not matter who, then what's going to happen to the de-industrialized West when the decentralization process accelerates, the dollar($) (all fiat currencies) begin to fall on a real basis (against commodities - especially precious metals), and interest rates need to rise?
The answer to this question is - nothing good - if you are a 'status quo' beneficiary - right from the oligarchs to the bureaucrats - up and down the line. What's worse, once the market(s) realize the Fed is actually impotent, with all credibility finally lost (the signal hyperinflation is on the way - think Venezuela), all hell could (should) break loose, with outsized moves in rates (bonds), $, and equities. Of course this does not mean stocks would go down - no - no - no. On the contrary, and if history is a good guide, they will go up - way up. And this is especially true of precious metal shares - and anything else with the word gold in its name. Because hyperinflation is just 'hidden collapse', where the price of everything goes through the roof - but everybody is priced out of existence.
Shakespeare was a romantic at heart. Thing is, he wasn't just another lost hedonist submerged in self-seeking enrichment, but a romantic with a conscious and a friend of the average man never the less. You can of course see this in his writing, where the most common theme running through his work is ruthless ambition (and cruelty) leads to its own destruction, because this tendency is man's downfall - and should be recognized, corrected, and avoided if possible. Unfortunately, evidenced in our increasingly neo-fascist world today, such thinking has proven wrongheaded folly, because on a base level most people are lost hedonists submerged in self-seeking enrichment - hell bent on self destruction in an effort to remain distracted. (i.e. from an increasingly dreary future.)
So you might as well have a laugh along the way, and keep the distraction factor high, which brings us back to why, in his genius, we have gems like The Taming of the Shrew. In order to remain distracted however, and on a more practical level, we need money to do this, which compels one to 'play the game'. In order to play (the game) effectively (profitably), one had better have an appropriate understanding of the game; along with a plan on how to deal with the competition because it's high, educated, ruthless, and corrupt. As alluded to above, your primary source of competition for scarce resources today is an embedded bureaucracy that runs right from the oligarchs; to the bureaucrats they have bought off; to their dogs (military, police, etc.). So again, one must know how to play the game if you are to prosper. You need to tame that shrew.
How do we, as investors 'tame' the complexity of this modern day shrew - a shrew that the users and abusers in 'high places' would have you believe is 'different' this time? The answer to this daunting task is found in the question, as assuredly some have already realized, that being 'keep it simple stupid'. Within such 'game theory', the only possible long-term counter strategy to successfully battle complexity is to employ a simplistic approach that looks down on the failings of the thinking, 'technology' will continue to bail out the human juggernaut - because it won't. Just look at the 'technology picture' today. We have the entire un-capitalized world on Facebook keeping them distracted, while the capitalized world is talking about driverless cars and any other form of technology to that puts these people out of work - because it's good for capitalism.
Fact of the matter is this little of the technological innovation 'the takers' hold so dear today will better the human condition like 'the wheel', never mind increase survival prospects of seven plus billion people facing a failing ecology (natural and manmade) - so systemic failure is the only possible outcome. And checking your Facebook messages ten times a day will not help this condition - but again, it keeps people distracted by scratching the compulsion itch. Unfortunately, it's this 'itch', this 'ticky behavior', that also controls many people's trading patterns, a result of the influence of technology - trading against the emotionless, binary, and fast machines. So its no wonder traders are going a little nutty - many now fallen by the wayside. Is that supposed to be a 'good result' of technology? It has been for the parasites (top 1%), but this will cost everybody big in the end.
In the meantime however, and in the spirit of a good hedonist, one must adopt the motto 'if you can't beat'em - join'em' right - which is why the hedge fund industry has been booming. This fallacy is finally being debunked however, where simply holding an index fund has been proven to be far better than giving the vast majority of these clowns your money - even the big successful ones. And again, as pointed out above, this realization is finally starting to negatively effect participation rates in actively managed (mutual and hedge) funds. It's not going to help investors with official intervention (prop desks, money printing, etc.) and high frequency trading (HFT), which is why indexers continue to outperform; however, it does signal a growing stress in the markets, financial industry, and scheming parasites - which is what we need to see if a failure of the present 'moog fest' is ever to become a reality. (See Figure 1)
Technical note: The single most important observation one can make regarding the above weekly S&P 500 (SPX) plot is how prices have been rising divergently against falling volumes, a product of increasingly manipulated markets. This is not natural, and will need to be reflected in prices at some point, just when people can afford it least. In the meantime, it's off we go to SPX 2200 minimum, maybe 2300 plus to test the long-term channel bottom again. If the neo-liberals and Hillary are too maintain power this fall, a whole lot of tape painting will be necessary now the Brexit volatility.
Because I want my gold to go up one day with all this money printing - not being held prisoner by a bunch of clever paper pushers centered out of New York that continue to pander their stock market. I'm a hedonist too - as you are - it's natural. Thing is though, you don't have to be a corrupt and self-serving scoundrel, raping 'the system' on a daily basis, in order to exercise this tendency because it's unfair (not that 'fairness' ever matters) - and will eventually need to be corrected. And while a captive and dumbed-down Western population will have the damdest time actually doing something about it, this is not the case for the Chinese and Russians, who know our vulnerabilities, and are fully prepared to exploit them with the right provocation. Please, give me more gold because eventually the crazies in Washington will step over the line and all hell will break loose. (See Figure 2)
That's the big message in the Dow / Gold Ratio (DGR). It's telling you that while nominal stock market prices continue to rise, giving the impression the status quo is still in charge, real terms (against gold) tell us a different story, that the dead cat bounce since 2009 is almost over, and new lows in the DGR are on the way soon. You will remember we have gold going up into a Fibonacci 21-year cycle high in 2021 coming off the year 2000 bottom. That's the plan Stan, based on the belief the illusion that has now become America will be exposed for what it is over the next five-years, a fraud, and more earthly concerns (survival) grip the macro going into what will sure to be a time of increasingly dangerous wars no matter who gets into the White House. It's the survival of the fittest you see - in a world of now rapidly dwindling natural resources - absolutely necessary for our collective survival. (See Figure 3)
So make no mistake about it, eventually the American Empire will be tamed one day too - sooner rather than later if the Brexit vote last week is any indication (see below). This is when the material world will begin to matter in the financial markets once again, there and in the real world too. All the fairy tales coming out of mainstream media (MSM), the Hollywood propaganda machine, and officialdom, just won't matter so much anymore - so all you overpaid celebrities and other various other well-heeled scammers, carpetbaggers, and scalawags (confidence people) - look out. This is when silver, the status quo's 'whipping boy', will take off like a bat out of hell against stocks and never look back (see Figure 3), because you can't eat your shares, and you can disinfect things with shares either, however silver, which is both real money (to buy food) and a natural antibiotic, has many uses in addition to its function as money and jewelry, which is not how most view it. (i.e. they view silver as a source of cheap jewelry and something to make eating utensils.) And these uses will become increasingly important as time marches on because shrinking economy will erode affordability of all the luxuries technology now provides.
And then we have a pleasant surprise in Britain last week with the Brexit vote. Apparently the Scots are the only 'conquered people' on the Island today - no Bravehearts here. What does this mean? It means the decentralization process we have been talking about for so long now is on - in spades. It means Globalism as we know it is dead - evidenced by the excitement in other countries about similar prospects. If we get a similar result in Spain this weekend, very strong signals will have been triggered in that the eventual demise of the EU/euro will be visible - the demise of the Brussels connection (American sponsored unelected bureaucrats pirating Europe's wealth), corporatism, and the American Empire - and the rebirth of 'nationalism movements' world wide, now being modeled by Russia. It's important to understand all this doesn't mean trade between will crease, in spite of temper tantrums out of Brussels. In fact, inter-eurozone trade in the future will evolve and likely flourish in a more natural and common sense path with decreased influence from aggressive American interests - with only one thing on their mind(s) - Empire. The risk now is war with Russia as the power structure (neocons) States side attempt to hold onto their power.
What's more, the bureaucrats from Brussels back to Britain still have a few arrows in their quivers. While Cameron is stepping down, hopefully needing to find a real job, it should be understood that any Brexit (or the like in other countries) could be held up by his corrupt ilk in Parliament for up to 10 years (right now the talk is two-years minimum), so don't get too excited about all this just yet. Again, and in relation to the discussion above, we need to see silver set free to know things have changed for real - that the status quo is done. With silver unable to crack $18 last week in the face of all that's going on is the signal to the status quo legions not to worry - they are idiots - all is in hand - you will see - so keep selling it and buying stocks. It's encouraging seeing the markets reacting the way they are, and the talk coming from nationalism movements world wide, however the status quo is embedded, and will remain that way until something a kin to a 'Mad Max' event sends humanity into a real tailspin, so don't think these characters will disappear. They will simply move from the forefront until such a time the megalomaniacs of the world will be allowed to fully exercise their insanities once again. And again, this could come sooner rather than later with a gift from the neocons via World War III.
Wish I had better news, but that's the reality of the situation.
Because of this, good investing is definitely possible in precious metals.